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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission file number 0-16455

NEWMIL BANCORP, INC.

(Exact name of registrant as specified in its charter)

(860) 355-7600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.50 per share

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K ¨

Indicate by check mark whether the registrant is an accelerated filed (as defined in Rule 12b-2 of the Act). Yes x No ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the average bid and asked prices of such stock, as of June 30, 2003, is $88,852,000.00. The number of shares of Common Stock outstanding as of March 1, 2004, is 4,223,106.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement dated March 29, 2004 for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part II (Item 5) and Part III (Items 10, 11, 12 and 13).

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PART I

This Annual Report on Form 10-K contains and incorporates by reference statements relating to future results of NewMil Bancorp, Inc. that are considered “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, expectations concerning loan demand, growth and performance, simulated changes in interest rates and the adequacy of our allowance for loan losses. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within our markets, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological changes, changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties reported from time to time in our filings with the Securities and Exchange Commission.

General

NewMil Bancorp, Inc., (“NewMil”), a Delaware corporation formed in 1987, is the registered bank holding company for NewMil Bank (“the Bank”), a wholly-owned subsidiary. NewMil’s activity is currently limited to the holding of the Bank’s outstanding capital stock and the Bank is NewMil’s primary investment. NewMil’s net income is presently derived from the business of the Bank. Future establishment or acquisition of subsidiaries by NewMil is possible. For a discussion of the acquisition of Nutmeg Federal Savings & Loan, by NewMil in November 2000, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business”. Nevertheless, it is expected that the Bank will account for most of NewMil’s net income in the foreseeable future.

The Bank, which was organized in 1858, is a Connecticut chartered and Federal Deposit Insurance Corporation (“FDIC”) insured savings bank headquartered in New Milford, Connecticut. The Bank’s principal business consists of attracting deposits from the public and using such deposits, with other funds, to make various types of loans and investments. The Bank offers both consumer and commercial deposit accounts, including checking accounts, interest bearing “NOW” accounts, money market accounts, certificates of deposit, savings accounts, Individual Retirement Accounts and sweep accounts. The Bank provides 24x7 access to banking through automated teller machines in sixteen branches, through its internet site at www.newmil.com and through bank by phone.

The Bank offers a broad range of mortgage and consumer loans to the residents of its service area including residential mortgages, home equity credit lines and loans, installment loans and collateral loans. The Bank sells some of the residential mortgages that it originates on a servicing released basis. The Bank offers a broad range of mortgage and commercial loans to the companies and small businesses of its service area including lines of credit, term loans, Small Business Administration (“SBA”) loans, commercial real estate mortgages, and construction and development mortgages. In addition, the Bank offers services including money orders, travelers’ checks and safe deposit boxes. Although so empowered, the Bank is not currently offering trust services.

NewMil’s results of operations are significantly affected by general economic and competitive conditions, the real estate market, changes in interest rates, government policies and actions of regulatory authorities. The general economic climate over the past several years has been favorable. Should these conditions deteriorate, NewMil’s operations could be adversely impacted.

Market Area and Competition

The Bank conducts its business through nineteen full service offices, and one special needs office at an independent life-care retirement community, located in Connecticut’s Litchfield, Fairfield and New Haven Counties. The Bank’s service area, which has a population of approximately 460,000, enjoys a balance of manufacturing, trade, and service employment and is home to a number of Fortune 500 companies. Although the Bank’s primary market area is Litchfield and northern Fairfield counties, the Bank has depositors and borrowers that live outside of these areas.

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The Bank faces strong competition in attracting and retaining deposits and in making mortgage and other loans. Its most direct competition for deposits has historically come from other savings banks and commercial banks located in its market area. More recently, competition for deposits has developed from non-banking companies such as brokerage houses that offer a range of deposit and deposit-like products. Although the Bank expects this continuing competition to have an effect upon the cost of funds, it does not anticipate any substantial adverse effect on maintaining the current deposit base. The Bank is competitive within its market area in the various deposit products it offers to depositors. Due to this fact, management believes the bank has the ability to maintain the deposit base. The Bank does not rely upon any individual, group or entity for a significant portion of its deposits.

The Bank’s competition for real estate loans comes primarily from mortgage banking companies, savings banks, commercial banks, insurance companies, and other institutional lenders. The Bank competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it offers borrowers, real estate brokers and builders. Factors that affect competition include, among others, the general availability of funds and credit, general and local economic conditions, current interest rate levels and volatility in the mortgage markets.

Congress passed legislation in 1994 providing for a phase-in of full interstate branching. Connecticut law has since 1990 provided for full interstate banking and, more recently, has adopted legislation allowing interstate branching, subject to certain limitations. In recent years several out of state financial institutions, almost all larger and with greater financial resources than the Bank, have acquired Connecticut financial institutions and begun operations in Connecticut. This has both increased competition in NewMil’s market areas and resulted in the reduction of locally based competition through consolidations. NewMil may consider expansion within or outside of Connecticut provided appropriate opportunities and conditions exist. For a discussion of the acquisition of Nutmeg Federal Savings & Loan, by NewMil in November 2000, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business”.

Lending Activities

The Bank offers a broad range of mortgage and consumer loans to the residents of its service area including residential mortgages, home equity credit lines and loans, installment loans and collateral loans. The Bank also offers a broad range of mortgage and commercial loans to the companies and small businesses of its service area including lines of credit, term loans, SBA loans, commercial real estate mortgages, and construction and development mortgages.

One-to-Four Family Residential Mortgage Loans: The Bank offers a variety of fixed and adjustable rate loans, including adjustable rate loans that have fixed rates for an initial period ranging from 1 to 10 years and adjust annually thereafter. The Bank offers amortization periods of up to 30 years. The Bank’s adjustable rate loans generally have a limit on the maximum rate change per interest rate adjustment of 2.0% to 3.0%, and have limits on the total interest rate adjustments during the life of a loan ranging from 4.0% to 6.0%, depending on the initial rate and type of loan. The Bank’s adjustable rate loans include loans whose interest rate adjustments are based on U.S. Treasury constant maturity indices and other indices.

The Bank’s initial rates on adjustable rate mortgage loans are offered at levels which are intended to be competitive within the Bank’s service area and which are frequently at a discount from fully indexed contractual rates. The Bank charges origination fees ranging from no fee to several percent, depending on the initial rate and type of loan.

Adjustable rate mortgage loans allow the Bank to maintain a degree of rate sensitivity, though the extent of this sensitivity is limited by the re-pricing intervals and caps contained in each loan type.

The Bank’s residential mortgage loans are underwritten based on the borrower’s income in accordance with secondary market or investor standards. In evaluating a potential residential mortgage borrower, the Bank considers a number of factors, including the creditworthiness of the borrower, the capacity of the borrower to repay the loan, an appraisal of the property to be mortgaged and a review of the loan to value ratio.

Some of the residential mortgage loans that the Bank originates are originated for sale to generate fee income. All such loans are sold on a servicing released basis.

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Collateral and Installment Loans: The Bank makes collateral and installment loans, including home equity lines of credit, home equity loans, automobile and other personal loans. While the Bank offers fixed rates on its consumer loans and home equity loans, its home equity lines of credit are generally offered at or a spread over or under the Prime Rate. Home equity loans and lines of credit have risks similar to those associated with residential mortgages discussed above.

Commercial Mortgage and Multi-Family Mortgage Loans: The Bank also makes loans collateralized by mortgages on commercial and multi-family residential properties. Commercial and multi-family loans are offered on an adjustable rate basis, generally with a daily re-pricing frequency and with the interest adjustment tied to the Prime Rate. Loans may also be structured with fixed rate terms ranging from 1 to 5 years.

Loans collateralized by commercial properties, including multi-family residential properties, can involve greater credit risks than one- to four-family residential mortgage loans. The commercial real estate business is cyclical and subject to downturns, over-building, fluctuations in market value and local economic conditions. Typically, such loans are substantially larger than one- to four-family residential mortgage loans. Because repayment is often dependent on the cash flow of a successfully operated or managed property, repayment of such loans may be more susceptible to adverse conditions in the real estate market or the economy generally than is the case with residential mortgages.

Construction Loans: The Bank also makes construction loans to individuals and professional builders for the purpose of constructing 1-to-4 family residential properties, either as a primary residence or for investment or resale.

Commercial and Industrial Loans: The Bank offers secured commercial business loans, generally adjustable-rate loans with the adjustment of interest based on the Prime Rate plus a spread. The Bank believes it has been conservative in its underwriting standards for this market with the goal of obtaining quality loans for the portfolio. The Bank also offers SBA and other Government guaranteed loans. The Bank’s loan products are targeted for, and tailored to the needs of, the local business and professional community in the Bank’s market area. The Bank’s legal lending limit to any one borrower at December 31, 2003 was $7.8 million, or 15% of Tier I and Tier II capital. Generally, the Bank’s concentration to any one borrower does not exceed 50% of the Bank’s legal lending limit and the average loan size is under $500,000. Most business loans are secured by liens on business assets including inventory, receivables and or liens on real property. In addition, most loans are further secured by the personal guaranty of the owners of the business.

For further discussion of the composition and quality of the loan portfolio see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Financial Condition—Loans” on page 25 through page 27.

Supervision and Regulation

Federal Bank Holding Company Regulation: NewMil is registered under, and is subject to, the Bank Holding Company Act of 1956, as amended. This Act limits the types of companies which NewMil may acquire or organize and the activities in which it or they may engage. In general, NewMil and the Bank are prohibited from engaging in or acquiring direct or indirect control of any corporation engaged in non-banking activities unless such activities are so closely related to banking as to be a proper incident thereto. In addition, NewMil must obtain the prior approval of the Board of Governors of the Federal Reserve System (“the FRB”) to acquire control of any bank; to acquire, with certain exceptions, more than 5 percent of the outstanding voting stock of any other corporation; or, to merge or consolidate with another bank holding company. As a result of such laws and regulation, NewMil is restricted as to the types of business activities it may conduct and the Bank is subject to limitations on, among others, the types of loans and the amounts of loans it may make to any one borrower. The Financial Modernization Act of 1999 created, among other things, a new entity, the “financial holding company”. Such entities can engage in a broader range of activities that are “financial in nature”, including insurance underwriting, securities underwriting and merchant banking. Financial holding companies can be established relatively easily through a notice filing with the FRB, which acts as the “umbrella regulator” for such entities. NewMil may determine to become a financial holding company in the future.

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Federal Reserve System: NewMil is required by the Board of Governors of the Federal Reserve System to maintain cash reserves against its deposits. After exhausting all other sources of funds, NewMil may request to borrow from the Federal Reserve. Bank holding companies registered with the FRB are, among other things, restricted from making direct investments in real estate. Both NewMil and the Bank are subject to extensive supervision and regulation, which focus on, among other things, the protection of depositors’ funds.

The Federal Reserve System also regulates the national supply of bank credit in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits, and affect the interest rates charged on loans or paid for deposits.

Fluctuations in interest rates, which may result from government fiscal policies and the monetary policies of the Federal Reserve System, have a strong impact on the income derived from loans and securities, and interest paid on deposits. While NewMil and the Bank strive to anticipate changes and adjust their strategies for such changes, the level of earnings can be materially affected by economic circumstances beyond their control.

NewMil and the Bank are subject to minimum capital requirements established, respectively, by the FRB and the FDIC. For information on these capital requirements and NewMil and the Bank’s capital ratios see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources” and Note 10 to the Financial Statements—Shareholders Equity under Capital Requirements.

Connecticut Banking Law and FDIC Regulation: The Bank is a state chartered savings bank organized under the Banking Law of the State of Connecticut. Deposits are insured by the FDIC and FDIC insurance premiums are assessed on the Bank’s deposit base on a semi-annual basis at variable rates dependent upon the Bank’s capital rating and other safety and soundness considerations. The Bank is subject to regulation, examination and supervision by the Connecticut Banking Department and the FDIC. Both the Connecticut Banking Department and the FDIC issue regulations and require the filing of reports describing the activities and financial condition of the banks under their jurisdiction. Each agency conducts periodic examinations to test safety, soundness and compliance with various regulatory requirements and generally supervises the operations of such banks.

Sarbanes-Oxley Act of 2002: On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Sections 302(a) and 906 of Sarbanes-Oxley, require NewMil’s chief executive officer and chief financial officer to certify that NewMil’s Quarterly and Annual Reports do not contain any untrue statement of a material fact and that the Quarterly and Annual Reports comply with the Securities and Exchange Act of 1934 and that the information in the Report fairly presents the financial condition and results of operations of NewMil. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of NewMil’s internal controls; they have made certain disclosures to NewMil’s auditors and the audit committee of the Board of Directors about NewMil’s internal controls; and they have included information in NewMil’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in NewMil’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation.

Employees

The Bank had 169 full-time and 22 part-time employees at December 31, 2003. Management considers the Bank’s relationship with its employees to be good. The Bank’s employees are not represented by any collective bargaining groups.

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Subsidiaries

NewMil has two subsidiaries, NewMil Bank and NewMil Statutory Trust I. During March 2003, NewMil formed a subsidiary, NewMil Statutory Trust I, a trust formed under the laws of the state of Delaware, and issued $10 million of fixed/adjustable rate Trust Preferred Securities through a pooled trust-preferred securities offering. The other subsidiary, NewMil Bank is NewMil’s primary subsidiary and accounts for the majority of NewMil’s income. At December 31, 2003, the Bank had three wholly-owned subsidiaries, NewMil Mortgage Company, Asset Recovery Management Company and New Mil Asset Company. NewMil Mortgage Company is a passive investment company (“PIC”) that holds loans collateralized by real estate originated or purchased by the Bank. Income of the PIC and its dividends to NewMil are exempt from the Connecticut Corporate Business Tax. Asset Recovery Management Company and New Mil Asset Company were both formed to hold and liquidate certain foreclosed real estate and are presently inactive.

The Corporation makes its annual report on Form 10-K filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 available and free of charge on or through its internet website, www.newmil.com, as soon as practical after filing such material with, or furnishing it to the Securities and Exchange Commission (“SEC”). Copies of quarterly reports on Form 10-Q and current reports on Form 8-K may be obtained free of charge by accessing the SEC’s website at www.sec.gov. Copies of these filings may also be obtained from the Corporation or the Bank free of charge upon request.

The Bank conducts its business at its main office, located at 19 Main Street, New Milford, Connecticut, and through 18 full service branches located in Litchfield, Fairfield and New Haven Counties in addition to one limited service branch located in Southbury, Connecticut. The Bank owns its main office and seven of its branches. The eleven other full service locations are leased by the Bank. The following table sets forth certain information regarding the Bank’s branch offices, as of December 31, 2003.

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NewMil and its subsidiaries are defendants in routine proceedings arising out of, and incidental to, activities conducted in the normal course of business.

During the quarter ended December 31, 2003, no matter was submitted to a vote of the shareholders of NewMil.

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PART II

For the information required by this item see “Annual Financial Data (unaudited) in Note 17, “Selected Annual Consolidated Financial Data”. For a discussion of NewMil’s dividend policy and restrictions on dividends see “Management Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Dividend Restrictions”. For information on NewMil’s Stock Equity Compensation Plan see page 11 of NewMil’s Proxy Statement dated March 29, 2003.

The following table sets forth NewMil’s consolidated financial and other data at the dates and for the periods indicated. This data has been derived from NewMil’s audited consolidated financial statements. The results as of and for the years ended December 31, 2003, 2002, 2001 and 2000, and for the six-month periods ended December 31, 2000 and 1999. The six-months ended December 31, 2000 reflect the acquisition of Nutmeg Federal Savings and Loan Association on November 9, 2000.

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SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except ratios and per share amounts)

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BUSINESS

NewMil, a Delaware corporation, is a bank holding company for NewMil Bank, a Connecticut-chartered and Federal Deposit Insurance Corporation (“FDIC”) insured savings bank headquartered in New Milford, Connecticut. NewMil’s principal business consists of the business of the Bank. The Bank is engaged in customary banking activities, including general deposit taking and lending activities, and conducts its business from eighteen full-service offices in Connecticut’s Litchfield, Fairfield and New Haven Counties and one special needs office at an independent life-care retirement community in New Haven County. NewMil and the Bank were formed in 1987 and 1858, respectively.

Cautionary Statement

This Annual Report on Form 10-K contains and incorporates by reference statements relating to future results of NewMil Bancorp, Inc. that are considered “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, expectations concerning loan demand, growth and performance, simulated changes in interest rates and the adequacy of our allowance for loan losses. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within our markets, equity and fixed income market fluctuations, personal and corporate customers’ bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological changes, changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining regulatory approvals when required as well as other risks and uncertainties reported from time to time in our filings with the Securities and Exchange Commission.

Change in Fiscal Year End

In December 2000 NewMil changed its fiscal year end to December 31 from June 30. Previously, NewMil had changed its tax year to a calendar year basis, effective for calendar year 1999, to take advantage of Connecticut tax legislation related to banks and financial service companies.

Acquisition of Nutmeg Federal Savings and Loan Association

On November 9, 2000, NewMil acquired Nutmeg Federal Savings and Loan Association (“Nutmeg”) for a total purchase price of $20.3 million, in consideration for which, NewMil paid $10.3 million in cash and issued 1.0 million shares of common stock. Based on the terms of the agreement, Nutmeg shareholders received $8.38 per common share and $14.67 per preferred share, including a net gain (after expenses and taxes payable) on Nutmeg’s sale of certain loan servicing rights. Nutmeg was a federally chartered savings and loan association headquartered in Danbury, Connecticut, with $109.1 million in assets and $84.7 million in deposits with four branch locations, including two in Danbury, one in Bethel and one in Ridgefield, Connecticut.

Application of Critical Accounting Policies

NewMil’s consolidated financial statements are prepared in accordance with US GAAP and follow general practices within the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

NewMil’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements. These policies, along with the disclosures presented in Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that

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requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

The allowance for loan losses represents management’s estimate of probable credit losses in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance For Loan Losses” section of Management’s Discussion and Analysis.

Under SFAS No. 142, goodwill is regularly evaluated for impairment, in which case its carrying value would be reduced through a charge to earnings for any impairment. Core deposit and other identifiable intangible assets are amortized over their estimated useful lives and are also regularly evaluated for impairment. The valuation techniques used to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives could have a material adverse impact on the results of operations.

OVERVIEW

2003 was an excellent year for NewMil. NewMil earned net income of $7.5 million, or $1.73 per share, for 2003, compared with net income of $6.9 million, or $1.50 per share, for 2002. This represented a 15.3% increase in earnings per share for 2003 over 2002. NewMil’s results were achieved through growth in net interest income and non-interest income, offset partially by increased non-interest expense. Net interest income increased 6.4%, as a result of an increase of $40.2 million in average earning assets, primarily in average loans, offset somewhat by a slight decrease in the net interest margin, from 3.95% in 2002 to 3.93% in 2003. Non-interest income increased 3.8% in 2003, due primarily to increases in deposit account service charges, a result of internal growth. Operating expenses increased 3.6% in 2003.

Deposits grew $9.4 million, or 1.7%, to $558.2 million during 2003 compared with 15.3% growth in 2002. At December 31, 2003 NewMil had total assets of $704.0 million, up $42.4 million since December 31, 2002. The low interest rate environment continued to fuel the local housing market and contributed to record residential mortgage originations for the year.

The following discussion and analysis of NewMil’s consolidated results of operations should be read in conjunction with the Consolidated Financial Statements and footnotes.

RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 2003 and 2002

Analysis of Net Interest and Dividend Income

Net interest income increased $1.5 million, or 6.4%, to $24.5 million in 2003. This resulted from a $40.2 million increase in average earning assets, offset slightly by 2 basis point decrease in the net interest margin. The increase in earning assets is due primarily to internal growth. The net interest margin decreased to 3.93% from 3.95%. The decrease was due mostly to the effects of lower market interest rates during 2003 as compared with 2002 and to changes in deposit pricing and balance sheet mix. The following table sets forth the components of NewMil’s net interest income and yields on average interest-earning assets and interest-bearing funds.

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The following table sets forth the changes in interest due to volume and rate.

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Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest paid on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be adversely affected by changes in interest rate levels as determined by NewMil’s “gap” position, measured by the differences between the volume of assets and liabilities that are subject to re-pricing within different future time periods.

Interest Income

Total interest and dividend income decreased $1.3 million, or 3.6%, to $35.1 million in 2003. Loan income increased $1.3 million, or 5.4%, primarily as a result of a $76.4 million increase in average loans offset partially by lower average yields during the period. The decrease in average loan yield, down 96 basis points, is due to lower market interest rates in 2003 and changes in portfolio mix. Investment income decreased $2.6 million, or 20.7%, in 2003 as a result of lower average yields and volume. Average securities decreased $36.3 million, or 15.1%. The decrease in average investment yield, down 34 basis points, was due to lower reinvestment yields during 2003 and changes in portfolio mix.

Interest Expense

Interest expense decreased $2.8 million, or 20.7%, to $10.6 million in 2003 primarily as a result of lower rates paid, and changes in deposit mix, offset somewhat by higher average deposits and borrowings. Deposit expense decreased $3.0 million, or 27.5%, as a result of lower rates paid, offset somewhat by higher deposit volume and changes in deposit mix. Average interest-bearing deposits increased $35.7 million, or 7.5%, due to internal growth. Average NOW, money market, savings and certificate of deposit accounts increased $7.8 million, $15.5 million, $8.9 million and $3.4 million, respectively. The average cost of interest-bearing deposits decreased 76 basis points to 1.57%. Borrowings expense increased $274,000 as a result of higher average borrowings, up $7.6 million, offset by lower advance rates, down 3 basis points.

During March 2003, NewMil formed a subsidiary, NewMil Statutory Trust I, a trust formed under the laws of the state of Delaware, and issued $10 million of fixed/adjustable rate Trust Preferred Securities through a pooled trust-preferred securities offering. FTN Financial Capital Markets and Keefe Bruyette and Woods, Inc. acted as placement agents in the pooled offering. NewMil owns all of the common securities of the Trust and the Trust has no independent assets or operations, and exists for the sole purpose of issuing trust preferred securities and investing the proceeds in an equivalent amount of junior subordinated debentures issued by NewMil. The junior subordinated debentures, which are the sole assets of the trust, are unsecured obligations of NewMil and generally are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of NewMil.

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Provision and Allowance for Loan Losses

The following table sets forth changes in the allowance for loan losses and other selected statistics: